CME's new chief is in a big, big hurry

New CEO Terry Duffy has been consolidating power at CME for more than two decades. It's the only work he's known since college.

What does Terry Duffy want? Results. When does he want them? Today.

CME Group CEO Terry Duffy sometimes sings softly to himself as he swivels in his black leather executive chair, but don't mistake him for a laid-back leader.

Perched four floors above the Chicago River, which once flowed with grains that formed the basis of CME's commodity markets,​ Duffy says he has a different approach to​ spending and investing from that of his predecessor, Phupinder Gill, who exited abruptly last year.

Whether in the U.S. or abroad, he says, he will insist that expansion efforts, such as acquisitions or international partnerships, produce results pronto. "You have to be careful not to invest too heavily into something that's 10 years out, and could be 20 years out or 30, and it's still a dream," Duffy says in one of his first interviews since adding the chief executive title to his chairman role at the world's largest futures exchange. "Because if you run your business that way, you won't be running a business very long."

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Duffy, 58, has been consolidating power at CME for more than two decades. It's the only work he's known since leaving his bartending job in Wisconsin (as a student at the University of Wisconsin at Whitewater, though not a graduate) to become a hog pit trader at the Chicago Mercantile Exchange, where he learned about the futures business and politicking from senior industry statesmen like Chairman Emeritus Leo Melamed.​

Eventually, Duffy headed his own trading firm, TDA Trading, and joined CME's board in 1995, adding his voice to a mix of leaders shepherding the company through a slew of major changes—converting the member-owned exchange into a publicly traded company, merging with rival Chicago Board of Trade, and buying smaller exchanges such as the New York Mercantile Exchange and Kansas City Board of Trade.

Duffy isn't short on ego, and neither was Gill, who also built his career at CME, so it's not surprising that the two ultimately clashed, people in the industry say. While Duffy doesn't confirm or deny it, he won't elaborate. They both had "strong personalities," says Paul Peterson, a former CME executive who is now a professor at the University of Illinois at Urbana-Champaign.

Duffy concedes that he wasn't pleased in recent years when CME saw the value decline of one-off acquisitions, including trading platform Elysian Systems and credit information firm Credit Market Analytics, and says he doesn't have an appetite for "spaghetti-against-the-wall syndrome."

"My patience level for that is probably different than my predecessor's," he says, mechanically smoothing the pant leg of his tailored suit as if to brush away lint. "I just think you have to understand what the cost of something is today, and any theoretical value you add to it, you have to understand it's theoretical."

That thinking excludes Chicago-based CME's nascent venture fund, he says, but not international expansion endeavors. After Brazilian exchange partner BM&FBovespa dumped its stake in CME last year and couldn't reach renewed electronic trading agreement terms, CME turned around and unloaded its once over $600 million investment in the Sao Paulo exchange, the largest in Latin America. CME barely broke even, Duffy says. His management team hasn't decided whether to keep CME's smaller stakes in partner exchanges in Mexico and Malaysia. It also owns a stake in the Dubai Mercantile Exchange parent.

Some European efforts may also be on the bubble. CME launched a European clearinghouse in 2011 in London and added an exchange there in 2014, but customers have been slow to arrive. "It's no secret that it's just kind of there," Duffy says. "It's a startup at best, and there's been no decisions about what the future of that is going to look like right now. . . . I will tell you that I won't wait forever to figure out if it's going to work or not, because these things cost money." (His remarks were made before recent regulatory developments threatened Deutsche Boerse's $13 billion bid for London Stock Exchange Group.)

PAYING FOR HEDGES

Getting a toehold in China has been even more elusive, even though Melamed has spent years courting government officials there. CME mainly works through Asian outposts in Hong Kong and Singapore. Duffy says he isn't bullish or bearish on China but is focused on the fact that financial markets there are essentially closed to foreigners.

“You have to be careful not to invest too heavily into something that's (many) years out. . . . If you run your business that way, you won't be running a business very long.” — Terry Duffy, CEO, CME Group

Still, it's also about staying competitive, says Morningstar analyst Michael Wong, who notes that CME archrival Intercontinental Exchange in Atlanta has a bigger footprint outside the U.S., with offices in Canada and the Netherlands as well as the United Kingdom, Hong Kong and Singapore. With regulation and politics in flux worldwide, trading can shift, he says. "Having exchanges and clearinghouses in multiple jurisdictions hedges the business model," Wong says. "You often have to pay for hedges."

As the industry has matured and consolidated, CME has mainly stayed the course in the past couple of years, without major acquisitions or product introductions, Wong notes. Despite a healthy 12 percent bump in trading volume last year, CME's growth plateaued in prior years, with a dip and recovery between 2011 and 2014.

Duffy plans to bolster trading in index-linked contracts by poaching a Russell index license from Intercontinental this year, and he says he can boost business by helping customers better use the capital deposits that back their trading. But bigger growth opportunities may force bigger bets, as any trader knows.